Claiming a Total Loss on Your Auto Insurance Claim - “Totaling” Your Car

You’ve probably heard friends or family members talking about someone they know “totaling” their car. You’ve probably inferred that this means that they “totally” wrecked it, and that the car was now “totally” useless. While these things are most likely true, you probably didn’t know that the term “totaled” comes from the world of auto insurance, and that knowing its literal definition is important for every insured driver on America’s roads.

Welcome to the Insurance Buffet - Main Course: Liability Coverage

Each person’s car insurance coverage is actually a collection of different coverages. You might have liability coverage, income loss coverage, gap insurance, funeral benefits, uninsured motorist coverage - the list goes on and on.

All states require at least some form of minimum liability coverage to insure against the damage drivers may cause to other people’s property and persons. Most states do not require you to insure against any possible damage to your own property, but if your car is four or fewer years old, it’s probably a good idea to have collision and / or comprehensive insurance.

Collision and Comprehensive

Collision insurance covers you against damages to your car caused by striking an object (other than an animal), such as a traffic sign or another vehicle. Comprehensive, also known as “other-than-collision” or “OTC,” covers against damages caused by non-traffic related incidents, such as a tree falling and hitting your car, a thief breaking your window, or an animal running out in front of you while you’re driving and causing you to hit it.

When you select whether or not you want to carry collision and / or comprehensive coverage, you also select the amount that you want to insure. Obviously, the higher the amount insured, the higher your insurance premiums will be. Also, you wouldn’t want to insure your car for more than it’s worth, since ultimately the insurance company can decide that your car is “totaled,” and pay you only its “actual cash value” (ACV).

Understanding Your Liability Limits

Let’s say you carry $10,000 worth of collision coverage, and you’re in an accident that severely damages your car. If your car can be brought back to its original state for $5,000, then your insurance company will pay for its repairs, less your deductible. But if the damage would cost more to repair, say $9,000, your insurance company may elect to “total” your car and issue you payment sufficient to replace it. The price that you paid for the car three years ago is of no relevance to your insurance company - only the replacement cost, or “actual cash value” of the car today is important.

An unfortunate fact of finance is that cars depreciate rapidly. A car that you may have paid $20,000 for three years ago may be worth less than half of that today. For this reason, it’s important to always shop around for the best auto insurance policy, and to work with an agent or company that will make sure that you’re neither under-insured, nor over-insured.